Minerva bond risk due to deforestation links

BRAZILIAN meat exporter and processor Minerva Foods is in the market for a potential $1bn 10 year senior unsecured bond issuance to finance the acquisition of sixteen plants from competitor Marfrig.

The Anthropocene Fixed Income Institute (AFII) reports that this acquisition, announced on 29 Aug 2023, will create a beef giant in Brazil, which they say creates clear sustainability and valuation concerns given ongoing regulatory focus on deforestation.

The new bond will increase Minerva’s USD outstanding debt by over 65%, and extend the maturity of exposure for USD bond investors.

AFII’s guidance highlights significant sustainability risks for Minerva Foods that could lead to weak bond performance. They believe enhanced due diligence should focus on the following questions:

  • The plants being purchased have now been made public. There is evidence that at least two of these have sourced cattle from illegally deforested land. In a sector where opaqueness of supply chains has been used to avoid acknowledging environmental destruction, this can no longer be ignored.
  • The EU Regulation on deforestation-free supply chains prohibits the sale of products in the EU that contribute to deforestation. The costs of either improving supply chain management to comply, or the fines for non-compliance, will be significant. Fitch identifies this issue as being potentially negative for Minerva’s credit profile.
  • Minerva is at increasing risk of being subject to investment exclusions, or struggling to find banking partners. Deforestation risk is increasingly being accounted for by the investment and banking community and may fall into the scope of more exclusion policies. Such divestment trends could negatively affect the company’s bond prices, or impact its ability to refinance its debt.

The new bond mandate was reported on 4 Sep 2023, and we believe investor meetings are ongoing. It is anticipated that the deal will be formally announced in the coming days.

More details from AFII can be found here

J.P. Morgan will coordinate logistics. The proceeds will be used to fund the acquisition or repay existing debt.

In its rating assessment, Fitch highlights some potential ESG concerns, identifying two areas which are scored 4, which is below the neutral score where ESG issues would have a neutral or minimal credit impact on the entity.

Fitch assign a score of 4 for “Waste & Hazardous Materials Management: Ecological Impacts” due to land use and supply chain management – and it identifies challenges around monitoring supply chains in South America, and the risk of export bans leading to a negative impact on the credit profile.

This bond significantly increases the public debt issued by Minerva, and will potentially expose more investors to this issuer. Before buying this bond, investors need to consider the sustainability risks of the South American beef production sector.

New information published on the bond issuance confirms acquired plants have sourced cattle from illegally deforested land. This could hinder Minerva Foods’ ability to export to the EU market and presents heightened financials risks for investors.

AFII also notes that amongst the long list of bookrunner banks supporting this financing, there are some whose sustainability policies seem to be contradictory to conducting such business. For example, HSBC’s agricultural commodities policy states that “HSBC will not knowingly provide financial services to high-risk customers involved directly in or sourcing from suppliers involved in deforestation.”

The trend towards more focus on the environmental impact of deforestation should reduce banking and financing options for these businesses, and is another risk factor for bond prices.

Watch our interview with Stéphanie Mielnik from the Anthropocene Fixed Income Institute

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